Time to lead and explain

At the 1922 general election the Labour party more than doubled its representation, rising from 57 to 142 seats. This election was fought soon after the ‘Geddes Axe’ was wielded, which slashed public expenditure in an effort to restore the pre-first world war parity in government incomes and spending.

The impact of these cuts was every bit as deleterious as the bleakest predictions today of what George Osborne’s cuts could mean. ‘In 1938’, as Martin Wolf reported in the Financial Times last year, ‘real output was hardly above the level of 1918, with growth averaging 0.5 per cent a year. This was not just because of the Depression. Real output in 1928 was also lower than in 1918. Exports were persistently weak and unemployment persistently elevated.’

Yet the key section in Labour’s 1922 manifesto was not entitled ‘No austerity’ but ‘How to find the money’. It is undoubtedly true that the ‘Geddes Axe’ was economically destructive. Osborne’s failure to grasp this brings to mind Hegel’s famous dictum that history teaches us that we learn nothing from history. There is, however, another lesson for Labour from our 1922 manifesto. This is that political credibility depends on being able to say where the money will come from, especially when there is less of it to go around. Labour in 1922 identified tax rises and spending cuts that would finance its manifesto commitments. This did not mean accepting the ‘Geddes Axe’, just as saying where the money would come from today would not mean accepting Osborne’s cuts.

It would, though, mean accepting some cuts. We spend more on housing benefit and tax credits than any other working-age benefits. We could control the former by capping rents payable to private landlords and the latter by making a reality of the predistribution aim of equalising pre-tax income. Strong arguments from a fiscal realist perspective chime with traditional leftist concerns that it is not the role of the state to featherbed private landlords and subsidise poverty pay.

There are both backward- and forward-looking strategies towards a recovery of Labour’s fiscal credibility. The backward-looking strategy tries to draw a line between where the party is now and where we were in government. But while Labour has repositioned itself on immigration, welfare and Iraq, policy changes directly targeted upon recovering fiscal credibility have been relatively scant.

The forward-looking strategy looks ahead to a Labour government and explains how the spending of such a government would be financed. The use of rent caps to control housing benefit and a scaling-back of tax credits would fall into this category, though reducing tax credits could also be painted as a symbolic break with a policy much associated with Gordon Brown’s time at the Treasury.

A forward-looking strategy more faithful to Brown would be to accept the government’s overall spending and debt targets at the time of the spending review. There is speculation about whether the party will do this and mirror a commitment made by Brown as shadow chancellor in advance of the 1997 general election.

Brown also implemented a golden rule that was intended to maintain healthy public finances. Osborne mocked this in his first budget by saying: ‘We are set to miss the golden rule in this cycle by £485bn.’ There may, therefore, be limited political mileage in Labour reviving a golden rule but a similar device was effectively used by Sweden during its fiscal retrenchment. The Swedish approach involved tough and binding fiscal rules that set budgets with a medium-term outlook and mandated surpluses when the going was good.

In separate sessions at the Progress political weekend in 2011, Douglas Alexander and Jim Murphy each argued that Labour needs ‘a draw on the deficit and a win on growth’. Since then, the economy has performed poorly and public finances remain in a terrible state. The debate about what Labour needs to do to recover fiscal credibility, as well as the argument about how public finances can best be improved, have both largely been overtaken by how growth can be recaptured.

It remains the case, though, that we need that draw on the deficit, as well as a win on growth. Even a very modest economic recovery would allow the Conservatives to extend the six-point lead that they hold over Labour on economic competence at the time of writing, and paint Labour as an unaffordable risk.

We neuter these inevitable attacks by being able to explain – as we did in 1922 – where we would find the money. The party’s commitment to zero-cost budgeting – questioning every line of public expenditure from first principles – is welcome but has not yet produced any tangible policies. Such questioning is likely to lead to different policy positions – for example, on tax credits – to those which we adopted in government.

While some element of a backward-looking strategy, differentiating the Labour party of Miliband from the party of Brown and Tony Blair, may help communicate a sense of a changed party, this should not be the fundamental objective. Instead, this should be to demonstrate that our sums add up. In this sense, the point often made by Andrew Adonis holds: the right policies are the right politics.

We need affordable policies for the delivery of Labour’s political ends. And we need them soon. We must, as Adonis also insists, lead and explain, lead and explain. The leadership must soon be consistently explaining our affordable alternative if Osborne’s narrative of Labour as an unaffordable risk is not to set in concrete around us.